Israel to Demand Tax Report Amendments From Local Outposts of Tech Multinationals

The Israeli Tax Authority wants local subsidiaries of multinationals to retroactively take into account stock-based compensation provided to employees in their tax reports. Last week, local lawyers and accountants received a letter from the authority, announcing that Israeli subsidiaries are required to amend any tax reports submitted in the past few years in light of an April ruling by Israel’s Supreme Court, which affirmed that call options are wage-equivalent and thus fall under labor costs when calculating taxable profit. The new directive applies to companies that remunerate on a cost-plus basis.

For daily updates, subscribe to our newsletter by clicking here.

The ruling rejected a tax assessment appeal by Kontera Technologies Ltd., a local subsidiary of Amobee, itself a subsidiary of Singapore Telecommunications (SingTel) Ltd. The court affirmed the authority’s position, which was opposed by many companies operating in Israel over the years, and redefined some of the ways transactions between multinationals and their Israeli research and development centers are to be taxed.

In the letter, the authority’s senior deputy director general Roland Am-Shalem stated that companies that awarded their employees with stock-based compensation but did not include the charges in their cost base must now do so, including “by filing amended reports for past years.”

He further warned companies that those failing to do so might end up paying higher taxes as a result of a tax audit that will decide upon a higher plus margin, as well as possible fines and penalties.

The demand to amend past tax returns is not legally valid before the supreme court’s decision is published, Yair Benjamini of Israeli law firm Benajmini & Co., said Thursday in an interview with Calcalist. The announcement “represents an attempt by the authority to tax companies that have yet to undergo a tax assessment,” he said, adding that by bringing up the possibility of penalties, the authority may be hinting that companies that do choose to file amended reports may receive lenient treatment.

It is commendable that the authority is making its position known publicly more often, said Noa Lev Goldstein, a partner at Israeli law firm Eitan Mehulal Sadot, in an interview with Calcalist Thursday, but the legitimacy of the decision is questionable.

In the past few years, the supreme court has ruled in favor of the authority on a number of directives, Lev Goldstein said, adding that she “cannot recall” a previous instance where the authority put out a comprehensive call for a retroactive amendment of reports. The demand that companies retroactively amend their tax returns, and the threat of penalties and higher plus margins, is a much more strict approach for the authority to take, she said.